“What should I do with my old 401k?”

The idea of working for just one company your entire life is, for most people today, a thing of the past. And if each new job includes a new retirement plan, you might ask, “What should I do with my old 401(k)?”

There are five options for dealing with the old 401(k) plan:

Leave it with the former employer.

Roll into your new 401(k) at your current job.

Roll into new individual retirement account (IRA or Roth IRA).

Cash it out and take the money now (BEWARE!).

Section 72(t) equal payments distribution.

Let’s walk through those options with some important considerations in mind: fees, your age, the flexibility with the money you need, and your willingness to keep track of multiple accounts.

Option 1 – Leave it with the former employer.

Out of sight, out of mind? A major risk with leaving a 401k account with a former employer is the administrative fees going up now that you’re not a current employee. A difference of just one percent more in administrative fees can cost you tens of thousands of dollars by the time you retire.

Another risk is that you can lose track of the old account if the firm administering it changes. For tips on locating old 401(k) plans, see the end of the article.

There are a few situations where it can be advantageous to leave the 401(k) with the former employer. If you prefer the oversight of the plan versus rolling it to an IRA that you manage yourself, you may want to leave it be. [This would not apply if you are going to move the balance to a new company 401(k) plan.] If your account contains company stock, there may be other income tax implications that you would want to discuss with your advisor before withdrawing or rolling over the account. Some other situations to consider are if you are worried about protection from creditors (the money is safer in a federally protected 401(k) rather than an IRA), or possible access to group life insurance.

Option 2 – Roll into your new 401(k) at your current job.

First, make sure you are happy with the investment options and fees at the new job. If you like your new portfolio and want the simplicity of tracking the performance of all your 401(k) assets within a single account, then this could be a good choice. You’ll have to arrange the rollover with the old plan’s administrator, complete required forms and choose the new investments once they have transferred.

If you are less satisfied with the new options and only intend to make the minimum contributions in your new plan to get the employer match, then maybe you would prefer to roll your old 401(k) into an IRA (see Option 3).

Example of an employer match: Your employer promises to match 100% of 3% of your salary that you contribute to the 401(k). You earn $80,000 per year and have enough taken out pre-tax from your paycheck so by the end of the year you have put $2,400 to your 401(k) account. Your employer will give you the full match of $2,400. Even if you contribute more, you’ll only get the $2,400 match at that same income level.

An age-related advantage to using a 401(k): You can withdraw funds without penalty starting at age 55 from a 401(k) if you are retired/fired/quit versus having to wait until 59 ½ for penalty-free withdrawals from an IRA.

This option is generally recommended. There are so many more options for investing in an IRA than there are in a 401(k): mutual funds, ETFs, individual stocks. The fees can be as small as a fund like Vanguard Total Stock Market ETF, which has a fee of 0.05%. You can gain more flexibility and lower expenses with the IRA.

You can move a traditional 401(k) directly to a traditional IRA, or a Roth 401(k) to a Roth IRA without a taxable event. If you want to put the balance of a traditional 401(k) to a Roth IRA, you’ll pay taxes on the balance now but then you’ll enjoy tax-free growth, and withdrawals after the account is 5 years old AND you are at least 59½ (you can always withdraw the contribution since you’ve already paid the taxes on that). If you’re in a lower tax bracket now than when you retire and have the cash to pay the taxes, this may be a good choice for you, but check to see if it’s allowed for your particular account.

Option 4 – Cash it out and take the balance now (BEWARE!).

Taxes and penalties can be very expensive! If you are under 59 ½, you will lose 10% of the balance to an early withdrawal penalty from the IRS. Your former employer is required to withhold 20% of the balance to put toward the income taxes you’ll pay on the entire balance, so you will receive a check for 70% of the balance. You may owe more than the 20% when you file your return depending on your tax bracket. Cashing out means throwing away the 10%, and also losing out on years of future gains. This should only be done in certain circumstances.

Option 5 – Section 72(t) equal payments distribution.

Available regardless of your age, the 72(t) means you take substantially equal periodic payments from the 401(k). The payments can be monthly or annually, and you will not be charged the 10% early withdrawal penalty. They must be for the minimum of 5 years or until you turn 59½. There is an annual cap on how much you can have distributed each year. For example, if you are 50 and have $100K in your account, you can take up to around $6K per year. There are several ways to calculate what you can take out, so have a financial advisor help with this. The 72(t) is for those who need some cash flow for a short term, and you won’t be cashing out the entire account. Note: This option can be done whether you leave the 401(k) with the former employer or roll it to the new one. Like any traditional retirement account, you pay income taxes on the payments.

If you need to locate old 401(k) plans, here are some places to start:

-Contact old employers or former co-workers who may have info for the firm administering the plan

-Most plans file a “Form 5500” with the government annually. You can search for your former employer’s name at www.freeERISA.com.

To assure you did contribute to a 401(k), look at your W-2 forms. The contribution will be in Box 12.

The choices for what to do with the old 401(k) retirement plans are many and can have complex answers. Speaking with a financial advisor is the best way to be clear on the risks and benefits of each option as they relate to you.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the Dragon Financial Group employees providing such comments, and should not be regarded as a description of advisory services provided by Dragon Financial Group or performance returns of any Dragon Financial Group clients. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Dragon Financial Group manages its client accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.